In the article on “How much does it Cost to Own a Bar” we have already explored how the ball park figure needed to open a bar can range between a few hundred thousand dollars all the way into the millions. Now let’s take a closer look into the breakdown of the costs involved.

To open up a moderately sized bar, we’ll be considering an example where the investment capital required is $305,000 with an additional $35,000 for working capital.

If you’re wondering where all the money goes and how it’s used, you should have a much better idea after reading this detailed guide.

Company Setup & Professional Fees ($5,000)

Inexperienced entrepreneurs normally underestimate the administration and finance related costs in a new business. These include legal, accounting, tax and costs related to forming a company and abiding to all the requirements that are related to it.

The costs of setting up a limited liability company varies from state to state and country to country. In general, they can be formed for under $1,000 depending on which state you intend to open your bar, but there may be recurring annual fees and taxes, or other costs such as the requirement to publish the notice of formation in two (county) newspapers for startups in New York.

Although professional fees for on-going accounting, tax and legal services needed should be classified as an operating expense rather than a start up costs, it is advisable to budget a few thousand dollars to account for matters relating to opening the business. This includes legal services for the lease agreement, any joint venture or shareholders agreement, tax planning and countless other accounting related systems to give you the necessary edge to run an efficient business.

Rental & Other Deposits ($15,000)

The business premises for a bar is one of the most important financial costs for startup capital requirements and recurring monthly rental costs. A lot of people are aware of the need to pay rent each month, but overlook the 2 or 3 month rental deposit that’s required in the lease agreement.

So, if you’re renting a place that costs $4,000 a month, you may have to place a $12,000 deposit with the landlord to secure the lease. There are also other deposits (ie utilities) that are needed but these are notably less than the rental deposit, and a few thousand dollars should be more than enough to cover them.

2.5 Months Rental ($10,000)

Apart from the rental deposit, you will have to pay at least 1 month’s rent in advance. In addition, it may be 2 months or more (for the entire build out) from the time you take vacant possession of the premises (ie. the time when the rental costs start running) until you finally open up when you can begin to generate sales.

So, it’s probably safe to budget for two and a half (2.5x) months worth of additional rental costs to cover for this. If your monthly rental is $4,000 a month, this means adding another $10,000 to the list.

Pre-Launch Operational Costs ($10,000)

Similar to the rental, in the month or two before you actually open the bar to customers, you will need to pay for some staff costs and any other related expenses when you’re not even earning any money.

Although you can keep payroll to a minimum by hiring part timers who are only paid when the business is running, you’ll have key team members who will be important in the initial setup phase to plan the operational systems, marketing strategies and how the whole bar will be run. At the same time, every member of staff will need to be trained and properly prepped before opening.

These pre-launch costs will depend on the size of the bar and the size of the team, as well as the make up of the team members. For example, if there are not many highly paid managers and lots of freelance part timers, this cost will be significantly lower than a setup that has numerous managers and permanent staff who need to be onboard before the bar is open.

If you’re unsure of what these costs may be, it’s safer to over budget and put aside 2.5 x your rental costs, which turns out to be $10,000 for our example of a bar with $4,000 rental costs per month.

Liquor License & Business Permits ($20,000)

It is imperative that you do thorough research about all the business permits and alcohol licensing requirements for the state and country where you intend to open up a bar or nightclub. The laws vary significantly and it may take some time to get your application approved, so plan meticulously and try to get these permits and licenses resolved before incurring hefty overheads.

Research the licensing requirements for your area carefully as there may be separate licenses needed to serve beer and wine, and a separate one for hard liquor. In some places, it may be necessary to get a permit for live entertainment as well, so do your homework and find out all the costs diligently before opening up.

The cost of alcohol licenses range widely from under $10,000 for a beer and wine license in some state’s towns to over $200,000 for a full liquor license in a major city like Boston. Evidently, liquor licensing could be one of the largest costs to start and operate a bar, so make sure you’ve considered all your options in detail and incorporate licensing considerations into your bar’s business plan.

In addition to the fee paid to the state’s alcoholic beverage commission for this license, you may also need to pay for a ‘Late Hours Permit Fee’ if you intend to open for business into the early hours of the morning.

Renovation & Interior Design ($35,000)

The build-out costs can also vary greatly and it is one of the largest costs of starting a bar. Construction cost overruns can bankrupt new bar ventures even before they’re open, and they commonly drain bars of their startup capital to the point that many other areas such as marketing are insufficiently funded to the point of causing the business to fail.

Unless you’re from the construction or interior design industry, or you’re experienced in setting up similar retail outlets, you should place very close attention to how you’re going to build your bar and appoint trustworthy consultants to help you out.

There is tremendous room for overspending on designing and kitting out your bar, and the sky is literally the limit, so it’s imperative to work to your budget as tightly as possible. If you have experienced designers and builders working with you, you’ll be able to save a lot of money, but if you engage unscrupulous contractors, you could be in for a tough ride as they take advantage of your inexperience and squeeze as much as they can out of you.

For the purposes of our example, we have a budget with an upper limit of $35,000 for the build out.

Furniture, Fittings & Equipment ($85,000)

The cost for a bar’s furniture and fittings may be incorporated into the build out costs if there’s a main contractor that is handling it all. Or, you may be billed from various sources if you’re actively managing the project and dealing with various suppliers.

From lighting, decorative items, and bar stools, to wall features and the bar itself, every inch of the premises will need your attention and money to solve. Your decisions are critical in ensuring that you get the best value for every dollar spent.

For example, if you’re buying 100 bar stools, and you spend an extra $30 each, that means that there will be an additional cost of $3,000. But if you try to save that three grand at the outset and end up with poorly designed products that need to be completely replaced after a few months, it could cost you much more than the initial savings.

When it comes to bar, audio-visual, point-of-sale (POS) and all the other equipment needed in a bar, it’s safe to say that if you’re a first time bar owner, you’ve never purchased these items before. If you’ve worked in a bar previously, you may have some knowledge of using some of the equipment, which gives you an added advantage, but you’ll still be in the dark for all the others.

There are lots of areas where you can potentially make very costly mistakes because you’ve never set up a bar before. Try to read as much as you can, talk to as many experienced people as you can and pay for professional advice to avoid the countless potholes you’ll have to avoid.

In our example, we’ve budgeted $85,000 here, which makes a total of $120,000 for the entire build out and all the furniture and equipment needed in the bar.

Bar Inventory & Other Supplies ($17,500)

If you only serve the popular beers and a limited range of wines, you won’t have to purchase as many stock items compared to a full bar that has a broad range of beers, an extensive wine cellar and a comprehensive choice of liquors offered for sale.

This range of stock items has a big impact on the total cost of your inventory, as it can all really add up if you try to cover all the potential brands for each type of beverage.

In addition, once you’ve confirmed the number of different stock items you intend to have in your inventory, you need to decide on how many units of each to stock. This is when your inventory costs start to balloon enormously if you havn’t controlled the range of drinks listed in your menu.

To decide on the quantity of each stock item to buy, you need to project your anticipated sales and the turnover of each stock item, as well as the frequency that you intend to replace your stock. All these factors will directly affect your purchasing pattern and how much money you need to invest in your inventory.

Naturally, if you can get attractive pricing and good payment terms from vendors, you’ll need to invest less capital in the inventory, but for most new bars without any track record, you’ll probably have to pay in cash until you’ve established a solid relationship with your suppliers.

We’ve budgeted $17,500 for the bar in our example, which is probably on the low side if you’re opening a fully stocked bar for a big nightclub, but it should be more than enough for a local watering hole where beer is the main seller.

Marketing & Advertising ($7,500)

Once you’ve got your bar set up, you need to let your target market know that it’s the place to be. Money needs to be allocated for a huge launch party, placing ads in local media, conducting public relations exercises, spending on marketing activities and investing in brand building.

A bar or nightclub’s marketing plan is extremely crucial, as it will ultimately determine the fate of the business. Successful bars will normally attract patrons via an effective word-of-mouth strategy that is much cheaper than paid advertisements. If you can’t get people to talk about your bar and bring friends along, you’re going to have a tough time getting the critical mass that you need to make some serious money.

A great marketing and branding strategy doesn’t necessarily need a lot of money to make it work. However, if you have an awful plan, no amount of money is going to build your brand equity and continually bring paying customers into your outlet.

Assuming that you have an innovative approach to engage your targeted clientele and a frugal promotions plan, $7,500 should be sufficient to cover for all marketing materials and any launch party activities, especially if you know how to tap on vendors to help sponsor the costs of the marketing blitz.

The first thing to do when you want to be profitable in a bar or any other business is to understand the basics of how profits are generated.

Some people think that the path to huge profits is to have lots of sales. Although this is partly true, it is not necessarily so as there are plenty of bars that are packed with customers and generate sizeable turnovers, but end up loosing money at the end of the month. If you’re inexperienced in business, you make be asking, how is this possible?

Profit = Sales – Costs

This is because a company’s profit is calculated by subtracting its costs from the sales. In other words, Profit equals Sales minus Costs. Hence, to generate a profit, your sales revenue needs to be higher than the costs incurred by the business. And to generate higher profits, you need to increase sales and/or decrease costs.

Evidently, there is a direct relationship between profits, sales and costs. Cash inflows from sales is vital to all bars and the majority of owners put most of their resources towards this goal, but cost control is also extremely important and far too many people give this insufficient attention.

Operational Expenses vs Cost of Sales

In fact, there are two types of costs in any trading related business like a bar – the cost of goods sold (or the direct cost of the sales generated) and the fixed operational costs (commonly known as overheads).

Although they are both outflows for the business that must be controlled, each of these costs should be treated and managed with different strategies.

It is essential to keep the monthly operating expenses as low as possible by managing payroll tightly, ensuring that you’re not overpaying for rental, and keeping a lid on unnecessary staff, marketing and administration costs. By watching these operational costs closely, a bar will have a lower breakeven sales level, be profitable more easily and produce higher profits each month.

Profit from Lower Inventory Costs

The purchase cost of beverages and other goods sold is vital in determining the profitability and price competitiveness of a bar. Basically, you’ll be able to make a higher profit on each sale if you can source your products as cheaply as possible. In the same way, if you overpay for your inventory, your profit margin will be less, assuming that you’re selling the product at the same price.

Inexperienced bar owners often pay a little more than they should because they feel that there’s not much difference between paying $2.40 for a product vs trying to get it for 40 cents cheaper at $2. Although in absolute terms, 40 cents is not much on a single unit, if you’re purchasing 5,000 units per month, that’s an additional cost of $2000 that has to be paid. So, try to buy your bar’s stock for the lowest possible price, as every dollar saved will be added directly towards your monthly profit.

Sales Revenue = Price x Volume Sold

Once you’ve got your costs as tight as possible, the key to high profits is through solid revenues from sales in the bar or via any other income streams.

There are normally 2 main components that produce the monthly sales in a bar – the price of drinks sold and the number of drinks sold. For example, if you sell 1,000 bottles of beer at a price of $8 each, you’ll generate $8,000 sales revenue from that product.

Clearly, both the unit price and volume sold both affect the sales produced, but in reality, a bar can’t change its pricing often, so the main determinant of sales on a month-to-month basis tends to be the volume of drinks sold. This is where the sales and marketing plan for the bar is crucial in attracting and retaining lots of customers.

Drinks Pricing Strategy

Even though it can’t be changed on a regular basis, the pricing strategy for drinks in a bar is absolutely vital in affecting its profit levels. It’s obvious how the selling price is directly related to how much profit is generated per unit sold, but pricing also has a huge impact on the total volume of products sold. This is because it’s harder to sell huge quantities of highly priced drinks, since customers are generally quite price sensitive. In the same way, if you price your drinks lower, you’ll be able to sell more volume but each sale will generate a lower profit.

As you can see, pricing has a very significant impact on potential profits and it is essential for new bar owners to get this right from the start. There’s a fine line between trying to price as high as possible, and knowing your target customers’ thresholds and price sensitivities.

At the end of the day, your pricing plan should suit your bar’s brand offerings and market positioning, If you’re a no-frills watering hole for the layman, then make sure you serve affordable booze, but if you’re an up-market bar for high-rollers, you should have your Cristal priced appropriately.

In summary, to run a profitable bar, you need to know how to generate as much sales as possible, as well as be aware of all costs and keep them under control. Ultimately, you will need to understand the basics of accounting too and work closely with your accountant to constantly review the Income Statement and fully incorporate all the administration, finance, taxation and other costs into the calculation of your operation’s profit figure.

It’s amazing how new and even experienced entrepreneurs can often get tangled up in trying to define the business model for a club or bar when it can actually be very simple if you don’t over complicate it.

Revenue Model

In essence, the majority of bars and nightclub businesses make money by selling drinks. In addition, some also generate revenue by charging patrons to enter the establishment through ticket sales that may or may not include a first drink.

As such, there are a couple of revenue streams, each with a differing profit margin. In the case of drinks, the profitability will depend on the pricing and purchase cost of each product type. For front door charges that do not include a drink, the gross profit margin is technically a 100% unless there are any direct commissions given to sales agents. If the entry charge includes a first drink, then the margin will depend on the type of drink that is provided with the entry fee.

Direct Costs

There may also be special occasions when the club hires a famous DJ or performer to play for the night, paying thousands of dollars in fees to the celebrity and any other agents, as well as incurring additional marketing and advertising costs to promote the event. As a result, the tickets for these events will be significantly more than the usual entry fee, as it needs to make up for the artist’s professional fees and all the other costs involved. However, sponsors will often cover some of the expenses and the heftily priced tickets may generate a huge profit for the club owners.

The bulk of a club’s income is derived from selling drinks, where there is usually an average margin of about 50% to 80%, depending on the pricing, type of bar and purchasing power. Having said that, it is worth noting that the margin for some items could be well over 100% a lot of the time. For example, a beer that is sold for $10 may cost $6 to buy. In this case, the profit is $4 and the profit margin is $4 divided by $6, which comes to 66.66%. This should not to be confused with the Cost of Goods Sold (COGS) or Cost of Sale, which is $6 divided by $10 or 60%.

The revenue model for a club or bar is made up of the income streams that we’ve just looked at, and together, they produce the gross sales for the business. When we deduct the direct costs related to generating these sales, such as the purchase price of the beverage items, we are left with the Gross Profit.

Operating Costs

Next, comes the fixed expenses or operating overheads that need to be incurred even if there are no sales at all. These include the property’s rental, staff costs, utility bills and other expenditures required to run the club.

Profit Before Tax

This Operating Expense (or OPEX) needs to be deducted from the Gross Profit to arrive at the Net Profit (before taxation). To calculate the real profits that are made each month, you have to further deduct the tax that is payable on the profits to work out how much is left.

In a nutshell, this is the basic financial model for almost every bar and club all around the world.

Can bars make money for their shareholders? This is the question that almost all budding bar owners are trying to figure out before they take the plunge to open their own dream bar.

Unfortunately, there is no simple yes or no answer because it really depends on a number of factors that vary for different companies and ventures.

Can it vs Will it Make Profits

So if you want to know if you CAN make a profit by running a bar, the answer is yes, of course you can, since there wouldn’t be so many bars in existence if it wasn’t profitable for the people who own them.

However, if you’d like to know whether you WILL make lots of money by setting up the bar you have in mind, then the answer is that it is certainly possible, as long as you have all the knowledge, experience and a fair bit of luck on your side.

Profitable Cash based Business

The bottom line is that bars can be extremely profitable cash businesses that have very few bad debts from customers who owe them money, assuming you’re not foolish enough to give credit to your regulars.

It is one of those businesses where customers pay up front for a product even before it is consumed, and credit doesn’t have to be given, which means no collection problems. At the same time, if you play your cards right, your suppliers may give you 30 to 60 day (or more) payment terms to settle your purchases, so you’ve got the best of both worlds.

Possible to Consistently Make Money

If you have the right formula, location and team, it is possible to earn a lot of money every week, especially during the initial months when you’re the new and hip place in town. Even after this honeymoon period, if you know what you’re doing, you could be cash flow positive for a good few years or more, and end up making a huge return on the initial capital invested.

Unfortunately, while it is certainly possible to generate extraordinary amounts of profits from a bar, the majority of businesses end up loosing money. The ones that are successful tend to be owned and run by experienced operators who have normally been in the industry for many years and have learned the tricks of the trade from their past failures.

Anyone who is thinking of opening a bar naturally wants to know how much it takes to setup the business in order to decide on whether it’s a feasible project to pursue.

In general, most bars are started up with a capital investment of somewhere between $125,000 and $500,000. Depending on the size, location and type of place you have in mind, some small bars can be opened with under $100,000 and large nightclubs in popular areas may require more than $1 million to be invested, but on the whole, small to medium sized outlets need about one or two hundred thousand dollars to get going.

Now, even if these seem like lofty numbers, you may not need to invest so much money if you have other partners and co-owners who will contribute their share of the startup capital.Less Money for a Minority Ownership

If you want to be a bar owner but you don’t have much money, you can always take a small stake in a venture. Technically speaking, if you invested $10,000 to own a 10% share in a Sports Bar that cost $100,000 to set up, you’re already a bar owner. Although your investment is significantly less than someone who owns 100% of a million dollar Nightclub, you’re both still bar owners all the same.

So, depending on whether you’re a sole proprietor, a major investor or a small shareholder, the cost of owning a bar business may range between $10,000 (for a minority partner in a small bar) to half a million or more (if you put up all the money yourself for a sizeable nightclub).

Example Breakdown of Bar Setup Costs

These are most of the major areas where the startup capital will need to be spent to set up a new bar. It includes placing deposits, investing in assets, purchasing inventory and incurring expenses before the bar is open for business, as well as budgeting for a few months of working capital to ensure there’s money in the bank to cover for any unforeseen events.

The cost for your bar is unlikely to have exactly the same capital requirements, as it will depend on the type, concept and size of bar you’re opening. Some costs such as the liquor license will also vary depending on which state or country you’re operating in. In addition, rentals and rental deposit costs could also be significantly higher or lower depending on the location leased.

Hopefully, you have now got a better idea of the main costs involved in setting up a bar. The example discussed should have provided you with a framework to modify and use for the bar you have in mind.

As you can see, it takes quite a fair bit of money to start up a bar, so make sure you find out more about whether it is profitable to own a bar before you invest your hard earned cash.

Bars are one of those retail businesses which have a relatively low barrier to entry for new startups to enter and compete in the market.

In other words, all you really need is money in order to open your own bar.

However, to remain profitable, you must have the knowledge to run it yourself or be able to hire an experienced team who will manage the business.

If you’re thinking about opening a bar, here’s a useful step by step guide on how to open a bar:

Write a Detailed Business Plan

Budget for the Required Startup Costs

Budget for the Cost of Stocks and Bar Inventory

Analyze the Overheads & Operating Costs

Allow for a minimum of 3 months Working Capital

Finalize the Total Capital Required

Find the Money to Fund the Business

Confirm a Name for the Bar and Company

Incorporate a Company

Open a Bank Account

Deposit the Capital into the Bank

Find a Location for the Bar

Sign the Property Lease/Rental Agreement

Register the Business with the Local Authorities

Get all the Relevant Permits and Licenses

Engage an Interior Designer & Contractor

Renovate & Furnish the new Premises

Purchase all Bar and Operations Equipment

Hire the Management Team and Staff

Train & Get Uniforms for all Team Members

Confirm your Menu & Stock Requirements

Enter Menu Items & Pricing into the POS system

Negotiate Contracts & Terms with Suppliers

Purchase all Inventory necessary to run the bar

Test all Audio, Visual and Lighting Equipment

Do a trial run with the entire operations team

Open the Bar for Business

Okay, that’s just the broad outline. Now, you really need to think through the details within each point mentioned.

Unless you’ve run a similar business before, chances are that you may not understand some of the steps highlighted. Make sure you figure them out, as you should really try to know the business inside out before starting out.